The following discussion is intended to assist you in understanding our business and the results of our operations. It should be read in conjunction with the Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2008. Certain statements made in our discussion may be forward looking. Forward-looking statements involve risks and uncertainties and a number of factors could cause actual results or outcomes to differ materially from our expectations. These risks, uncertainties, and other factors include, among others, the risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the Securities and Exchange Commission, as well as other risks described in this Quarterly Report. Unless the context requires otherwise, when we refer to "we," "us" and "our," we are describing ARC Wireless Solutions, Inc. and its consolidated subsidiaries on a consolidated basis.

BUSINESS OVERVIEW

Unfavorable changes in domestic and global economic conditions resulted in an adverse effect on our sales revenue in the first quarter 2009. Many of our large customers experienced surplus inventories from weakened sales of their products in late 2008, thereby reducing orders for our products in first quarter 2009. If economic conditions decline again in the future, our revenue could continue to be adversely affected. But, we continue to focus on cutting our operational and general costs in order to improve our gross margins until demand rebounds. We have no debt outstanding, and we have a cash balance of approximately $12.2 million at March 31, 2009.

Results of Continuing Operations for the Three Months Ended March 31, 2009 and 2008

Total revenues were approximately $1.1 million and $1.9 million for the three month periods ended March 31, 2009 and March 31, 2008, respectively. The decrease in revenues during the three months ended March 31, 2009 compared to the three months ended March 31, 2008 is primarily attributable to decreased sales of our 3.5 GHz Antennas and our Global Positioning Systems (GPS) in our Wireless Communications Solutions. We expect sales of our Broadband and GPS products to closely trend with future economic global conditions.

Gross profit margins were 40% and 38% for the three months ended March 31, 2009 and March 31, 2008, respectively. The 2% increase in gross margin is primarily due to lower operating costs resulting from our efforts in successfully transitioning most of our production to China through our Hong Kong subsidiary, ARCHK, as well as reducing overhead from our U.S. plant operations. We expect gross margins to continue to improve as we fully complete our manufacturing transition to our ARCHK facilities.

Selling, general and administrative expenses (SG&A) decreased 20% to $741 thousand in the first quarter 2009 as compared to $929 thousand in the prior year period. But, SG&A as a percent of total revenues increased from 49% for the three months ended March 31, 2008 to 68% for the three months ended March 31, 2009. Salaries and wages, including commissions, remains the largest component of SG&A costs, constituting 32% of the total SG&A costs for the three months ended March 31, 2009 and 51% for the three months ended March 31, 2008. The majority of the overall decrease in SG&A is related to decreased personnel and salary costs as compared to the prior year period, but we are continuing our efforts to streamline our operations and reduce our office costs, public company and other administrative expenses.

Net interest expense decreased from $10 thousand for the three months ended March 31, 2008 to approximately $3 thousand for the current quarterly period primarily related to decreased amounts outstanding during the period under our Credit Facility with Citywide Bank. At March 31, 2009, we had no debt outstanding. Our Credit Facility expired on May 1, 2009 and is no longer outstanding.

Other income decreased during the first quarter 2009 to approximately $33 thousand as compared to $118 thousand in first quarter 2008. The decline in interest income is primarily due to a decline in our cash balances along with a decline in interest rates on money market funds where a significant portion of the funds are invested.

There is no provision for income taxes for the three months ended March 31, 2009 and 2008, due to our net losses for both periods.

Results of Discontinued Operations for the Three Months Ended March 31, 2009 and 2008 (See Note 2, Discontinued Operations for the detailed operating results of the discontinued operations)

Discontinued operations for the three months ended March 31, 2009 and 2008 represent the operations of our subsidiary, Starworks Wireless. In 2008, management decided to suspend its efforts to sell cable through its Starworks subsidiary so that it can focus on higher margin products through its Wireless Communications Solutions Division. Revenues for the three months ended March 31, 2009 were only $1 thousand compared to revenues of $13 thousand for the three months ended March 31, 2008 resulting in a loss from discontinued operations in 2009 of $12 thousand compared to a loss from discontinued operations of $8 thousand for 2008.

Financial Condition

                                            March 31,       December 31,
             (Thousands of dollars)           2009              2008

             Current ratio                  13.83 to 1          8.20 to 1

             Working capital (1)           $    12,900     $       13,155

             Total debt                    $         -     $            -

             Total cash less debt          $    12,159     $       12,943

             Stockholders' equity          $    13,338     $       13,616

             Total liabilities to equity     0.08 to 1          0.14 to 1

(1) Working capital is the difference between current assets and current liabilities.

We have a cash balance of $12.2 million at March 31, 2009 and hold no debt outstanding. We believe that we have the ability to provide for our remaining 2009 operational needs through projected operating cash flow and cash on hand.

The net cash used by operating activities from continuing operations was $769 thousand for the three months ended March 31, 2009 compared to net cash provided by operating activities from continuing operations of $169 thousand for the three months ended March 31, 2008. The two primary reasons for the change is a $176 thousand increase in the net loss from 2008 to 2009 and the increase in accounts payable and accrued expenses of $788 thousand.

The net cash used in investing activities from continuing operations was $4 thousand for the three months ended March 31, 2009 compared to $29 thousand for the three months ended March 31, 2008, primarily the result of expenditures for patents and equipment.

Net cash used in financing activities from continuing operations for the three months ended March 31, 2009 was $4 thousand compared to $447 thousand for the three months ended March 31, 2008 and the decrease in the net cash used is primarily the result of a decrease in net repayments on the line of credit of $443 thousand.